Credit Program Bill Aims To Help Businesses

Credit Program Bill Aims To Help Businesses

March 29, 1992|By MIKE SWIFT; Courant Staff Writer

Risk.

Without the state's financial institutions taking some, state economic development officials say, businesses cannot get the capital they need to hire new workers, develop new products and grow out of the recession.

But banks are avoiding risk because of the recession, so the state may take it for them -- in $400 million in loan guarantees, a credit-expansion program that officials say would be the largest of its kind in the country.

Gov. Lowell P. Weicker Jr. is a strong supporter of the major expansion of the Connecticut Works Jobs Fund, the loan and loan-guarantee program that most recently was tapped to save Colt's Manufacturing Co. from liquidation last week.

The day the Connecticut Development Authority approved a $2 million loan guarantee through the jobs fund to save Colt's, Weicker proclaimed in legislative testimony: "We're in the risk business right now to keep people at work."

Risk taken by the state does not directly equal state spending. But there is a connection.

Joseph J. McGee, the state commissioner of economic development, said at the most, 10 percent of bank loans made to businesses under the program might go bad. If all $400 million in guarantees was offered, that would mean the state would be on the hook for $40 million, plus the interest on bonds that would be sold to cover that payment.

Weicker, McGee and the Republican and Democratic leadership of the commerce and exportation committee tout the loan-guarantee program as a way to infuse more than $1 billion into the economy. That source of money, along with easing the tax burden to businesses, could protect or create 20,000 jobs in coming years, committee leaders said.

But even legislators who voted to advance the program out of committee recently are concerned whether state oversight of loans made by banks under the guarantee program will be sufficient. For

the program to work, proponents say, businesses must have access to credit without too much red tape. Less red tape, however, also could mean less oversight of the loans banks are making.

Rep. Shaun McNally, D-Norwich, who voted for the program in committee, said last week that oversight requirements must be tightened. The bill will now be seen by the finance, revenue and bonding committee.

"These financial deals are very complicated, and there are lots of ways people, if they see a free source of money, can tap into it in ways we hadn't anticipated," McNally said.

Other doubts persist: McNally said that while the program is aimed to help businesses, banks also would benefit by the state's underwriting the riskiest parts of their loans.

William J. Stanley Jr., president of the Connecticut Bankers Association, said that by letting banks make loans they otherwise wouldn't have made, the program would give banks new opportunities to make money.

But Stanley said "we're not going to make a ton of money on it." More than 20 banks, including all the major banks in the state, have agreed to take part, Weicker said.

The proposed bonding in the program -- $50 million in new bonds and transfer of about $200 million in bonding authority to the jobs fund that had been unused in a 1960s-era industrial mortgage guarantee program -- could face a struggle before it reaches the House or Senate.

Rep. Thomas S. Luby, D-Meriden, co-chairman of the commerce committee and a main proponent of the plan, said it must first survive tough questioning from the finance, revenue and bonding committee. "It is by no means a done deal or a foregone conclusion," Luby said Thursday. "There are a lot of internal discussions that have to take place."

The program would use a principle called "leverage." By offering $400 million in loan guarantees to banks, backed with $50 million in new bonding and about $200 million in old bonding authorizations, the state hopes to "leverage" $1 billion or more in loans from private banks into the economy. The state bonds would not actually be sold unless a loan went bad. The bonding authorizations do not have to equal the amount of the loan guarantees, McGee said, because the state knows that not all loans will go bad.

One reason businesses have trouble getting loans now, officials and banking experts say, is the Federal Deposit Insurance Corp. requires that banks making many loans in troubled industries, such as construction, put a percentage of the loan in reserve to ensure against losses, even if the company receiving the loan is profitable.

That requirement makes it much less likely that the bank will approve the loan, Stanley said.

"Regulators require you to have capital to make a loan," Stanley said. The recession, by saddling banks with a heavy burden of non-performing loans, has soaked up much of that capital, Stanley said.

The state would assume part of the risk of making loans to businesses by promising to make good on the first 20 percent to 40 percent of the bank's loss should the loan fail.

A key feature of the proposed plan, Weicker said in testimony before the commerce and exportation committee recently, is the FDIC

has preliminarily agreed to accept the state's loan guarantees in place of bank reserves, allowing banks to overcome regulatory limits.

Weicker told legislators that the risk to the state of the loan guarantee program would be "minimal."

The payoff, Weicker said, would be to stop credit for businesses from shrinking. That, said the governor, could "create positive momentum and inspire business confidence to bust our way out of the recession.